Which of the following is a key step in customizing a benchmark?

The chosen answer highlights an essential aspect of the benchmarking process, which involves a thorough review and necessary modifications to ensure the benchmark aligns well with the specific investment strategy and objectives of the portfolio. Customizing a benchmark requires an assessment of how well the initial selection reflects the risk and return characteristics pertinent to the investment process.

In practice, this means analyzing various components of the proposed benchmark, such as the asset classes, sectors, geographic exposure, and style factors it encompasses, and adjusting them as needed to better match the intended investment approach. This iterative process helps refine the benchmark, making it a more effective tool for measuring performance and providing insights on the investment strategy’s effectiveness over time.

Other options present approaches that are less relevant to the customization of a benchmark. Rebalancing based solely on forecasted returns does not consider broader market conditions or changes in the investment environment, which could lead to misalignment with the actual investment strategy. Constructing a benchmark exclusively from published indices may overlook custom factors or unique investment criteria that a specific portfolio requires, which is vital for an effective benchmark. Lastly, implementing changes without monitoring undermines the purpose of creating a benchmark because ongoing evaluation and adjustments to the benchmark are crucial for its ongoing relevance and effectiveness.